The paper aims to provide basic facts on the international carriers industry in the country, specifically the taxes and fees imposed on them to serve as inputs to fiscal policymakers.
Connectivity plays a vital role in the economic development of a country. The Philippines being an archipelagic nation, relies heavily on the transport sector for the movement of people and goods. It is through air and sea connectivity that we are able to link our country to the global economic market.
Recent developments in the international air industry in the country have reduced our connectivity to other countries. The termination of the direct service of Air France — KLM to Manila ended the last available flight from Europe to the Philippines. This was part of KLM’s efforts to counter the impact of the current tax regime on international air carriers in the country.
At present, international air and shipping carriers in the country are subject to the Gross Philippine Billings Tax (GPBT) and the Common Carriers Tax (CCT). There are now proposals seeking the abolition of the said taxes. In fact, the International Air Transport Association (IATA) and the Board of Airline Representative (BAR) have communicated strong opposition against these taxes claiming that the same are discriminatory and inconsistent with the rulings of the World Trade Organization (WTO) of which the Philippines is a member, as well as the resolutions of the International Civil Aviation Organization (ICAO) to which the country is also a signatory.
At present, there are seven (7) domestic airlines and one (1) Philippine affiliated airline. Of the seven (7) domestic airlines, four (4) have both domestic and foreign destination flight services, two (2) have domestic but no foreign destination flight services and one operating exclusive foreign destination flight services.
Airlines Domestic
Destinations Foreign
Destinations
Air Asia Philippines* Yes Yes
Air Philippines Corp. Yes Yes
Cebu Pacific Air Inc. Yes Yes
Southeast Asian Airline, Inc. (SEAIR) Yes Yes
Philippines Airlines, Inc. (PAL) Yes Yes
Asian Spirit Yes No
Zest Airwyas, Inc. Yes No
Spirit of Manila Airlines Corp. No Yes
*Philippine affiliated airline.
Source: Civil Aeronautics Board (CAB) and websites of the different airlines.
At present, Philippine Airlines, Inc. (PAL) is the only local airline operating in all 17 foreign countries and the only one with direct flight services to Australia, Canada, the Middle East and the USA while all others have direct flight services to Asian countries only. However, there are no local airlines operating direct flight services to any European countries. On the other hand, as of 2011, there are 43 international air carriers with landing rights in the Philippines.
- Income Tax
International carriers doing business in the Philippine are subject to a tax of two and one-half percent (2 ½%) based on their Gross Philippine Billings (GPB) pursuant to Section 28(A)(3) of the National Internal Revenue Code (NIRC) of 1997, as amended or to the applicable tax treaty rate. On the other hand, non-resident owners or lessors of aircraft are subject to a tax of seven and one-half percent (7 ½%) of gross rental or fees earned by them while non-resident owners or lessors of vessels are subject to a tax of four and one-half percent (4 ½%) of the gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority (MIA). In the case of international air carriers, it should be noted that not all of them are subject to the GPBT. On-line carrier is an international air carrier having or maintaining flight operations to and from the Philippines and is subject to the 2.5% tax on GPB as well as the 3% CCT. On the other hand, off-line carrier is an international carrier having no flight operations to and from the Philippines and is not subject to the 2.5% GPBT and the 3% CCT. The GPBT is the counterpart of the 30% regular corporate income tax which is imposed on domestic and resident foreign corporations. The present GPB tax treatment is an approximation of what would otherwise be the tax liability under a net income basis and was adopted for ease of administration. The difference in the tax treatment in fact, favors international carriers since as computed before, the 2.5% GPBT rate approximated the then 25% corporate income tax based on net taxable income. If the approximation made before will be applied to the present 30% corporate income tax, the GPBT rate should be 3% instead of 2.5%. International carriers are further favored by the reduced tax rate of 1.5% if there is a tax treaty entered into by the Philippines and the country of the concerned international air carrier.
- Percentage Tax
The percentage tax on international carriers used to be part of the percentage tax on carriers and keepers of garages under Commonwealth Act (CA) No. 466 (Revising, Amending and Codifying the Internal Revenue Laws of the Philippines, approved on June 15, 1939) at 1½% rate that was increased by RA 39 (Amending or Repealing Certain Sections of Titles V and VII of the NIRC, approved on October 1, 1946) to 2%. Under the Tax Code of 1997, however, a separate provision was provided for percentage tax on international carriers with a 3% rate.
- Value-Added Tax
International carriers doing business in the Philippines are exempt from the value-added tax (VAT). Their sale, importation or lease of passengers or cargo vessels and aircraft, including engine, equipment and spare parts thereof for international transport operations are also exempt from the VAT under Sec. 109(S) of the Tax Code, as amended.
With respect to the importation of fuel, goods and supplies by persons engaged in international air transport operations, the same is exempt from VAT. However, the sale of goods, supplies, equipment and fuel to persons engaged in international air transport operations is zero rated subject to certain conditions. Services rendered to persons engaged in international air transport operations including leases of property for use thereof are considered zero-rated transactions under Sec. 108(B)(4) of the Tax Code, as amended.
- Excise Tax Treatment of Petroleum Products Sold to or Imported by International Air Carriers
Section 135(a) of the Tax Code, as amended states that petroleum products sold to international carriers of foreign registry shall be exempt from the payment of excise tax if (a) the petroleum products to be sold are stored in bonded storage tanks and (b) the disposition thereof shall be in accordance with duly promulgated rules and regulations of the Secretary of Finance. In addition, petroleum products sold to foreign international air carriers are exempt from the payment of excise tax if the country of the international air carrier exempts from similar taxes petroleum products sold to Philippine carriers.
The IATA and BAR have communicated its strong opposition against the CCT and the GPBT imposed on foreign airlines operating in the Philippines. They argued that these taxes are not imposed by other countries and they raise the costs for foreign visitors vis-Ã -vis competitive destinations in Southeast Asia such as Malaysia, Thailand, and Vietnam. They further argued that a tax regime which is comparable to international standards and practices will make the Philippines more attractive for foreign airlines as a destination, increase foreign tourism to the country, benefit the airline business of Philippine-owned carriers and expand the income streams of local tourism destinations.
The CCT may be removed provided that there will be countervailing revenue sources/measures that will compensate for the revenue loss. With regard to the GPBT, which is in the nature of income tax, freeing international airlines from GPBT is not in accordance with the basic principle of reciprocity, which governs international taxation. Thus, any proposal relating to the exemption of international carriers from GPBT should seek to give relief on international carriers based on the following conditions:
(a) By exempting them from or by imposing a preferential rate on their GPB subject to the applicable tax treaty or international agreements to which the Philippines is a signatory, or
(b) On the basis of reciprocity such that an international carrier, whose home country grants income exemption to Philippine carriers shall likewise be exempt from the income tax.
It is noted that at present, there are 37 Philippine tax treaties in force. However, out of the 17 foreign countries where PAL operates, only 14 countries have tax treaties with the Philippines. Thus, if the proposal based on reciprocity will push through, there are 23 other foreign countries with which the Philippines have tax treaties but where no local carriers are operating.
